Estimated read time: 5 minutes, 28 seconds

“Acquisition, conversion, and churn often require major cross-functional efforts to improve. Pricing typically requires replacing a small number with a bigger one.” -Patrick McKenzie

This might be one of the greatest quotes on the internet. If you’re not familiar with Patrick’s essays on SaaS (start here), they are a great summary of what really matters and match my own experience with growth-stage software companies from enterprise to start-ups. 

At Accel-KKR, I was responsible for drafting ‘Value Creation Plans’ for many of our growth-stage SaaS portfolio companies. Pricing was a constant theme and generally delivered the fastest path to impact — although often the hardest from a change management standpoint.

3 reasons tech companies fail to charge enough

I thought I’d share the most common reasons I’ve seen tech companies fail to charge enough. So consider this your personal nudge to revisit pricing along with a few specific ideas to get started without boiling the ocean. 

1. Not getting sales on board early

Start with a thought experiment: “If we raise prices 10%, what would the impact on win rates be? How many customers would we lose? What if we raised prices 20%? 30%?” 

This question helps you begin to understand your market’s price elasticity and infer a potential breakeven point. It also starts to get sales leadership intellectually over the hump, which is typically the toughest change-management aspect. 

Be sure you ask this question in the right way (e.g. How many deals out of the last 20 would you have lost if we priced at $xx?). Then, use that estimate to introduce the concept of a breakeven price increase and hopefully agreement that some price increase could make sense. 

I have often resorted to giving sales leaders veto power on the price increases if early results don’t bear out. 

Warning: Do not proceed if sales doesn’t seem committed or at least open-minded enough to be convinced with more data.

2. Underestimating willingness-to-pay (WTP)

Not every customer has the same willingness to pay…. duh, but that’s not an excuse to price too low for most customers. From an economic perspective, the goal is to price as close to each customers’ true WTP as possible. 

Underestimating WTP is the most pervasive reason for underpricing. This is where offering packages or tiers designed to serve unique segments can be effective. 

For many products, packaging for segments with a different WTP is obvious (e.g. solo entrepreneurs, small teams, large enterprises), but for others it requires a needs-based segmentation of the target market. 

Once you know your segments, you need to clearly identify your objectives for each segment (e.g. market penetration or user growth vs. revenue growth vs. profitability) and the customers’ alternatives within each segment. 

The latter is where understanding your customers’ WTP for your product vs your competitors and substitutes (e.g. excel) will be critical. 

Good signs your WTP is off when your customers can’t recall how much they pay you off the top of their head. Another way to think about it is what percent of your buyers’ budget do they spend on your product? 

If it’s a small fraction of their budget but you add a disproportionate amount of value — get to work. 

3. A lack of data 

I’d estimate that at least four out of five of the ~100 growth-stage software companies I’ve gotten to know well in my career could have increased prices with a positive outcome (i.e. the pros outweigh the cons), but about one in five actually do it. 

And for those, I’d estimate there was a 90%+ success rate. To be clear, these are growth-stage software companies with established product-market fit. 

The single biggest blocker in most of these situations is a lack of data. 

3 ways to gather data when considering raising your prices

Don’t get me wrong, it’s really hard and nerve-wracking to predict what will happen when you increase your prices. So how do you gather the data to gain the confidence that it’s the right decision? There are three primary ways: 

1. Run a survey

Surveys are fast and low risk but less reliable. Van Westendorp and conjoint analysis work best in my experience. MaxDiff surveys are also very useful in understanding relative value of features vs costs.

2. Test in the wild

Testing in the wild is much easier with a self-service model; otherwise, this takes longer and requires commitment, but the results are high fidelity. This can be structured as a A/B test where ⅓ or ½ of deals get the new pricing. With a sales-led approach, you have to be very careful of backsliding at the end of the quarter if leadership isn’t committed ‘to holding the line.” The other option is to make the pricing change for a month or a quarter and then review performance (e.g. win rates) to determine if you keep it. 

3. Track the data

Even if you don’t commit to fully reevaluating your pricing today, there are some easy things you can start doing today to track signals for your customers’ WTP. Set yourself up now to analyze pricing, discount bands, win rates, and gross margins by customer segments. The more information you start tracking today, the more evidence and data you will have in the future — when you get religion on charging enough for your product. 

Four people to follow if you want to learn more about pricing

Lastly, a few plugs for people I’ve learned pricing from along with resources if you want to learn more:

  1. Joe Sauer is one of the smartest pricing thinkers out there across a variety of industries. We’ve worked together on a number of successful projects.
  2. David Bell first taught me the market-based pricing frameworks I still use today.
  3. Wilson McCrory, Walt Baker, and Ryan Paulowsky showed me how to build and implement a pricing strategy in the real world and are all-around B2B sales and marketing gurus.
  4. Hagan Ramsey, Ryan McMullin, and Neil Patel at Accel-KKR help growth-stage tech businesses figure this kind of stuff out every day. There aren’t any better problem solvers in the B2B SaaS space. 

I’m starting to share learnings from my experience more frequently on Twitter, so if you hang out there, consider giving me a follow @kurtotally. 

And feel free to reach out if you’re struggling with something pricing or growth-related… happy to help if I can.